• Joseph Barreca

ECB Set to Raise Rates in July. But a EURUSD Signals a short term bear market



The ECB said during its June meeting that it will end net asset purchases under its APP as of July 1st 2022 and intends to raise the key ECB interest rates by 25 basis points in July. It will be the first increase in borrowing costs in more than a decade, as inflation in the Euro Area shows no signs of picking. The central bank also said it expects to raise borrowing rates again in September and the rise could be bigger than the one in July, if the inflation outlook deteriorates. From September, a gradual but sustained path of further increases will be appropriate. On the prince front, inflation projections were revised up to 6.8% in 2022, 3.5% in 2023 and 2.1% in 2014. The growth outlook was also revised to a lower 2.8% this year and 2.1% next year but for 2024, the economy is seen expanding faster by 2.1%. The key refinancing operations rate currently stands at 0%, the marginal lending facility rate at 0.25% and the deposit lending rate at -0.5%, all at record low levels.

 

The European Central Bank ended a long-running stimulus scheme on Thursday and signaled a series of rate hikes that may be scaled up from September if the inflation outlook fails to improve.


With inflation at a record-high 8.1% and still rising, the ECB now fears that price growth is broadening out and could morph into a hard-to-break wage-price spiral, ending a decade of anemic price growth and heralding a new era of higher prices.


The ECB said it will end bond buys on July 1, then raise interest rates by 25 basis points later that month. It will hike again in September and may opt for a bigger move then if inflation continues to surprise.


"The Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting," the ECB said.


"The Governing Council expects to raise the key ECB interest rates again in September," it said. "If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting."


 

The Euro fell more than 0.6% to around $1.065 after rising to as high as $1.077 earlier in the session, as investors come to terms that a possible larger than expected ECB rate hike in September will further darken the Eurozone’s economic outlook. The central bank decided to end net asset purchases under its asset purchase program and signaled it would raise interest rates by 25 basis points in July while leaving the door open for a bigger increase in September.


At the same time, the ECB downgraded its growth forecasts and revised its inflation projections upwardly. The central bank expects annual real GDP growth of 2.8% in 2022, 2.1% in 2023, and 2.1% in 2024. On the price front, the new staff projections foresee yearly inflation at 6.8% in 2022 before declining to 3.5% in 2023 and 2.1% in 2024.


 
EUR/USD Technicals

Although a rate hike in July could shine some positive light for the currency, in the short term we'll be looking for a push to the downside after a break of 1.065 support.


 
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